First Luna, now Celsius. What’s behind the latest crypto crisis?

In May, the UST algorithmic stablecoin and the Terra ecosystem collapsed, spreading panic across the cryptoverse. This week, it’s Celsius’ turn: The New Jersey-based crypto lender suspended withdrawals after facing what appeared to be a bank run.

Celsius’ troubles began in earnest on June 9, when Lido-Staked Ethereum (StEth) – a crypto derivative obtained by locking up Ether on staking platform Lido to validate Ethereum transactions – started to lose its value. This means that StEth could be purchased and swapped for less than Ether’s market price.

As the discount on Ether rose to 5% and then exceeded 10%, Celsius found itself looking down the barrel of a loaded liquidity crunch.

While Celsius can unlock its customers’ Ether by redeeming its StEth, that option won’t be available until months later, when the Ethereum Merge – the blockchain system’s upgrade – is  completed. This meant that Celsius’ only available option was to trade StEth for Ether at a loss.

Now, crypto markets are trying to figure out if two major crashes in just over a month is a coincidence or if there is something bigger and darker going on in the cryptosphere.

George Harrap, co-founder of Solana-based portfolio manager Step Finance, told Tech in Asia that he sees the crash of Terra’s Luna ecosystem and Celsius’ problems with StEth as “different mechanisms and different events.”

“The common thread is that the latest market movements with the general trend of everything being down – stocks, crypto, and everything else – are exposing some weaknesses in a couple of different protocols,” he says.

But Brian Fu, co-founder and co-project leader of zkLend, thinks that Celsius’ problems are directly related to the fall of Terra’s Luna ecosystem, which includes UST. Hong Kong-based zkLend is a money-market protocol built on StarkNet, an Ethereum Layer 2 solution.

It’s uncertain, however, if Celsius lost money in the Terra crash. Between December 2021 and May 2022, Celsius deposited 261,000 ether into Terra’s Anchor protocol.

On May 11, Celsius withdrew 225,000 ether from the protocol, analysis by The Block shows. What happened to  the company’s remaining 36,000 ether is unclear, though The Block quotes a source who said that the funds were ultimately removed.

Celsius also realized a loss estimated at US$22 million from the hack of decentralized finance (DeFi) platform BadgerDAO in December. The loss is based on a restitution plan set up by BadgerDAO. Celsius said it had lost money in the attack but did not confirm the amount.

What is Celsius?

As one of the largest companies in the crypto lending space, Celsius had loaned out over US$8 billion to clients and held almost US$12 billion in assets under management as of May. It claimed to have 1.7 million clients.

Staking Ethereum

Celsius’ well runs dry

Dead broke or just taking a breather?

The Merge to the rescue?

Long list of legal troubles

Contagion or one-off?

Lack of insurance and regulations

Lenders come knocking